Friday, January 29, 2016

"Why we'll never see another Warren Buffett or George Soros ever again "

From MarketWatch:
George Soros' investment track record made him the equivalent of a .400 hitter in baseball. Yet, in a decade that has been lousy for all investors, even the "Granddaddy of Hedge Fund Managers" has had it tough.

Soros quietly left the hedge-fund scene in 2011, turning his fund into a family office. But his last few years in the game were hardly like his first. Indeed, 2010 was Soros' worst year since 2002, with his flagship fund up a mere 2.63%. The following year was even worse, with his famed Quantum fund reportedly down 15%.

A quick glance at Warren Buffett's returns shows that the Oracle of Omaha has had a tough stretch as well. Over the past 15 years, Berkshire Hathaway's average annual returns have shrunk to 7.89%. Granted, that's over a span in which the S&P 500 has risen only 4.35% a year.

Nevertheless, these anemic returns are a long way from either Soros' or Buffett's glory days.
Prior to the dotcom bust in 2000, both Soros and Buffett boasted enviable "30:30" track records: Average annual returns of 30% over a period of 30 years. Today, Buffett's long-term track record in the 50 years between 1965 and 2014 has fallen to 21.6%. And last year's drop of 12.06% did little to improve it.

The last time hedge fund managers like John Paulson and Kyle Bass were able to generate outsized returns was in 2008 with a big bet against mortgages. And both Paulson and Bass have struggled since.

With consistent double-digit percentage returns a thing of the past, it is no wonder many of the original hedge-fund greats like Soros and Stanley Druckenmiller have called it quits.

So will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?
The short answer is "no,” and here's why ...

Why .400 Hitters in Baseball Disappeared
In his 1996 book, “Full House: The Spread of Excellence from Plato to Darwin,” the late Harvard paleontologist Stephen Jay Gould examined the question of why baseball had not produced a .400 hitter since Ted Williams in 1941.

Gould's argument is straightforward. The overall quality of performance in baseball has improved over time. That makes achieving "outlier" performances like a .400 batting average less likely.
On the one hand, it became harder for batters to get on base as pitchers mastered new pitches like the slider. Bigger gloves improved fielding. Managers became increasingly savvy in positioning their players defensively and using relief pitchers whose track records indicated they performed well against particular hitters.

On the other hand, batters became bigger and stronger with improved nutrition, the use of supplements and weight lifting. Today, baseball players spend less time brawling in bars and more time working out. Some even watch their diets closely.

As everyone in baseball ups the quality of his game, the top players are performing closer and closer to the limits of what is humanly possible. That also means less room for "variation" at the extreme edges of the performance bell curve — that is, where outliers such as .400 hitters can stand out.
As Gould puts it, the "truly superb cannot soar so far above the ordinary."

The same goes for hedge-fund managers
I believe that you can apply Gould's reasoning to the fading returns of the world's top investors. The success of both Soros and Buffett inspired a new generation of hedge-fund managers whose own competitive streak made the likelihood of "30:30" track records ever more remote.

Today, there are tens of thousands of "quants" armed with PhDs combing through global financial markets. These Soros "wannabes" have translated their insights into algorithms, which now account for over 50% of trading on U.S. stock exchanges.

In contrast, Soros described himself in his early career when he focused on mis-priced European securities as a "one-eyed king among the blind." When Soros was investing carefully in European securities in the early 1960s, he was the best simply because no one else was doing it....MORE
HT: Alpha Ideas (India) linkfest

It might be easier to see another Buffett than another Soros although Taleb says, because Soros did it with more swings of the bat he'd go with George, see also:

Warren Buffet: The King of Leveraged Low Beta (BRK.B)
Buffett's Alpha Redux (BRK.b)
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes) 
Warren Buffett's 50th Anniversary Letter to Berkshire Shareholders and Some Thoughts on the Early Years
Buffett's Alpha or How To Generate Better Risk Adjusted Returns Than Anyone Else in the Biz (BRK)
 Is Alpha Dead? Beating the Market Has Become Nearly Impossible

One real problem is something I mentioned in a rant on arbitrage a few years ago:

...People, people, people arbitrage opportunities have been disappearing for the past 150 years!

I guessing the two commenters didn't have the definition: "The simultaneous purchase and sale of the same instrument in different markets at different prices" pounded into their head so often their ears bled.
I did.
How many arbitrages do they think present themselves each year?

Spotting and acting on an arb is pure alpha and here is a dirty little secret:
The entire amount of alpha available to the entire hedge fund industry is only $30 billion per year.
As reported by a hedge fund maven via Investment News back in 2006:
...PHILADELPHIA - Everyone in the crowd assembled for the CFA Institute's hedge fund conference took notice when David S. Hsieh said that the amount of alpha available in the hedge fund industry each year is $30 billion.

Mr. Hsieh, a professor of finance at the Fuqua School of Business at Duke University in Durham, N.C., presented a synopsis of his ongoing research, which focuses on the style, risk and performance evaluation of hedge funds, at the Feb. 16 conference here. As part of his work, Mr. Hsieh questioned whether flows into hedge funds are causing a decline in hedge fund returns and what might happen if the high rate of inflow continues.

Because of difficulties in obtaining reliable hedge fund data, Mr. Hsieh used fund-of-hedge-funds data and broke down returns into alpha and beta sources. He said the research led him to "feel comfortable" determining that there is a finite amount of alpha - conservatively, $30 billion - managed by the approximately $1 trillion hedge fund industry. And even if capital invested in hedge funds were to rise, the amount of alpha would remain the same.... 
Got that? All alpha not just arbitrage but all alpha was just $30 bil. in '06....MORE, including links.

 -from our May 2013 post, "My Second-to-Last Comment on Izabella Kaminska at Tyler Cowen's Marginal Revolution".